Until March, The prospective collapse of multi-employer pension plans meant that over one million retired truck drivers, shop assistants, builders and other members of 186 schemes were at risk of losing their retirement benefits.
Moreover, the crisis faced by these plans was also threatening the existence of the Pension Benefit Guaranty Corporation (PBGC), a federally chartered corporation’ that insures pension plans. Its multi-employer programme was set to be exhausted by 2026.
But, for the time being, the disaster has been avoided thanks to an $86bn (€72bn) aid package to these multi-employer pension plans included in the $1.9trn COVID-19 relief bill. This measure has sparked a lively controversy, as critics point out that those plans’ problems do not stem from the pandemic. They also note the aid does not have any provisions to avoid similar problems in the future. On the contrary, they argue it sets a bad precedent for future bailouts of state and local government plans.
In the US, there are about 1,400 multi-employer plans covering about 10.7m active and retired workers. These workers are often employed in industries such as construction or entertainment where labour moves from job to job. They are defined benefit (DB) plans negotiated by a union with a group of employers typically in the same industry. The most prominent is the Central States Pension Funds that covers about 400,000 workers and retirees from more than 1,000 trucking companies. It has assets totalling $10.9bn, but an annual shortfall of about $2bn.
Last year, the aggregate funded percentage of multi-employer DB plans improved thanks to better investment returns, according to a study conducted by the actuary firm Milliman. It was 88% as of 31 December 2020. That was up from 85% at the end of 2019 and back to pre-2008 market crash level. But for the so-called “critical and declining” plans the aggregated funding percentage was only 34%, less that half of what it was at the end of 2007 (74%).
“The multi-employer plans that are in trouble may have lost workers and do not have enough members who make contributions. Other reasons for their problems may be too-low contribution rates compared to the promised benefits, or poor investment returns,” says Victor Harte, consulting actuary at Milliman.
“The problem of the weakest multi-employer pension plans has been bouncing around for too many years. It was time to wrap it up for the sake of the participants. And if the only way was to include the aid package into the COVID relief bill, so be it,” says Alicia Munnell, the director of the Center for Retirement Research at Boston College.
The $86bn aid package is meant to give the weakest pension plans enough money to pay promised benefits in full for the next 30 years. The bailout comes from taxpayers. It does not involve any reform in terms of accounting standards, discount rate for liabilities or assumed investment returns. Nor does it correct a critical flaw.
As Andrew Biggs, resident scholar at the American Enterprise Institute (a free market think tank), explained in an opinion piece in the Wall Street Journal, in these plans participating employers must cover the benefits promised by any employer that either goes bankrupt or withdraws from the plan. However, businesses are allowed to withdraw without funding all promised benefits. So these plans have a high percentage of “orphan” participants, whose employers no longer contribute.
“Since the government sets the rules for withdrawal liability, a strong case exists for a government contribution to solving the multi-employer problem,” says Munnell. “The package aid is positive because it has improved the situation for the retirees and taken the pressure off the PBGC. Of course, now the underlying problems should be addressed, such as defining the appropriate interest rate for calculating liabilities and perhaps replacing the traditional defined-benefit structure with some shared-risk arrangement.” In fact, according to Munnell, the traditional DB model no longer works.
On the other hand, the aid package already includes some restrictions on how the money can be used. “The multi-employer pension plans must invest the new money only in investment-grade bonds, and they cannot use it to increase benefits or cut contributions,” says Harte. “But the government has still to issue some rules to implement the aid package – for example, about the way future benefits should be calculated.”
Among critics concerned that the next step will be the bailout of failing state and local funds, Biggs asks: “If politicians accepted to bail out truckers’ and coalminers’ pensions, why would they turn away teachers and firefighters?”
That is not a realistic scenario, says Munnell. “State and local plans are not in a death spiral like multi-employer plans. They are not perfect, but their funding level is stabilising. Moreover, they have much more flexibility, space and resources to solve their problems.”